Joe Stiglitz: This Can't Go On Forever - So It Won't

For the past three years, falling interest rates have been the engine of growth, as households took on more debt to refinance their mortgages and used some of the savings to consume. Central bankers are hoping that this will not play out in reverse - that higher interest rates will not dampen consumption. Hope may not be enough. House prices could well decline; at the very least, the rate of increase is likely to slow down.

This is only one of the uncertainties facing the US economy. Clearly, some of the growth in 2004 was due to provisions that encouraged investment in that year - when it mattered for US electoral politics - at the expense of 2005. Then there are America's huge fiscal and trade deficits, which jeopardise future American generations' well being, and represent a drag on the current US economy.

As one of my predecessors as chair of the Council of Economic Advisers, Herb Stein, famously put it: "If something can't go on forever, it won't." But no one knows how, or when, it will all end. Indeed, President Bush 's election promises include partial privatisation of social security and making his earlier tax cuts permanent, which, if adopted, will send the deficits soaring to record levels. What, exactly, this will do to business confidence and currency markets is anybody's guess, but it won't be pretty.

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from the Guardian: